Lockwood, Ben (1999) Production externalities and two-way distortion in principal-multi-agent problems. Working Paper. Coventry: University of Warwick, Department of Economics. (Warwick economic research papers.

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Abstract

This paper studies an otherwise standard principal-agent problem with hidden information, but whether there are positive production externalities between agents: the output of any agent depends positively on the effort expended by the other agents. It is shown that the optimal contract for the principal exhibits two-way distortion: the effort of any agent is oversupplied (relative to the first-best) when his marginal cost effort is low, and undersupplied his marginal cost of effort is high. This pattern of distortion cannot otherwise arise in optimal single- or multi-agent incentive contracts, unless there are countervailing incentives. However, unlike the countervailing incentives case, the pattern of distortion is robust to the precise form of the externality.

Item Type:	Working or Discussion Paper (Working Paper)
Subjects:	H Social Sciences > HB Economic Theory
Divisions:	Faculty of Social Sciences > Economics
Library of Congress Subject Headings (LCSH):	Externalities (Economics), Production (Economic theory), Information asymmetry, Incentives in industry
Series Name:	Warwick economic research papers
Publisher:	University of Warwick, Department of Economics
Place of Publication:	Coventry
Date:	April 1999
Number:	No.527
Number of Pages:	30
Status:	Not Peer Reviewed
Access rights to Published version:	Open Access
Description:	First version, August 1997; this version, April 1999
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URI:	http://wrap.warwick.ac.uk/id/eprint/1651

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